Congress is trying to get funding for highway construction by linking it to a controversial tax break

Construction crews work on a freeway overpass along Highway 101 on March 26, 2012 in Novato, California. Justin Sullivan/Getty Image WASHINGTON (Reuters) - The U.S. Congress is setting the stage for months of debate on a tax break for overseas corporate profits, a perennial proposal made over by being linked to another issue, funding for highway construction.

The tax-break-for-road-funding package has backers but also many critics in Washington. By the end of 2015, it could provide a short-term highway funding solution and have a long-lasting impact on corporate tax policy.

Or it could founder on the rocks of fiscal stalemate that for years have wrecked other proposals for overhauling the loophole-riddled U.S. tax code. Either way, the debate will underscore the power of combining two politically appealing ideas, even when they have little in common.

In legislation introduced in 2013, Democratic Representative John Delaney created a combination that he called good policy and "good politics," offering something to both political parties.

"In the case of the Democrats, it's infrastructure. In the case of the Republicans, it's figuring out a way to get that money back from overseas," he said, referring to the estimated $2.3 trillion in profits stashed overseas by multinationals.

Criticized as "Delaney's Delusion" by a tax watchdog group when he unveiled it, the idea of giving overseas profits a tax cut to help fund U.S. highways is opposed by many, including influential business interests.

But differing versions of it have won support from the likes of Democratic President Barack Obama and Republican Representative Paul Ryan. Congressional minds have now been concentrated by the financial state of the Highway Trust Fund, which pays for half of U.S. highway and transit projects and is projected to go broke on Friday.

FUNDING HIGHWAYS

Republican leaders on Tuesday were prepared to pass a three-month highway funding extension to temporarily fund road and transit construction, while seeking a longer-term solution.

Lawmakers do not want to raise the gasoline tax, which has not gone up since 1993, so they are looking for other revenues.

Like some others, Delaney foresaw this problem when he first ran for a seat in Congress in 2012. "It was pretty clear to me that infrastructure should be our top domestic economic priority. But trying to find a way to pay for it was the challenge," Delaney said in an interview.

As a businessman, he said, he was also aware of a tax code loophole, known as the deferral rule, that lets companies avoid the 35-percent income tax on active profits generated abroad as long as they are not brought into the country, or repatriated.

Many companies would like to bring those profits home. In 2004, promising a boost to the economy, multinationals won a tax break on repatriated profits. More than 800 firms repatriated $362 billion at just 5.25 percent in tax.

But studies showed the repatriated profits went largely for dividends and stock buybacks. This soured Congress on future tax holidays, while multinationals began stashing away more profits overseas, hoping another would follow.

Speaker of the House John Boehner walks to the House Chamber where members of congress were voting on a package of trade bills in the U.S. Capitol in Washington Thomson Reuters

Lobbyists made no headway on getting another tax holiday until Delaney and others hit on a new approach. Instead of promising a vague economic boost from a repatriation tax break, it could be framed as a new government revenue source.

Building on an earlier proposal, Delaney has called for letting companies for a limited time repatriate foreign profits at 8.75 percent, saying this would yield $120 billion in revenue for the Highway Trust Fund. Obama embraced Delaney's framework in the latest White House budget proposal, but at a higher rate of 14 percent.

Two top senators, Democrat Chuck Schumer and Republican Rob Portman, recently sketched out a similar proposal, although they did not suggest a specific repatriation tax rate.

Ryan, the powerful Republican chairman of the House of Representatives' tax committee, has been talking to officials in the U.S. Treasury Department about such a framework and hopes to make progress over the next few months, his staffers said.

But several senior Senate Republicans are not enthusiastic. They argue that a mandatory, or "deemed," repatriation of corporate profits could produce a jolt of new revenue but deprive lawmakers of a needed tool in comprehensive tax reform.

"What ideally we'd all like to see is that (repatriation) being used to lower rates," said Senator John Thune, a member of the Senate's Republican leadership.